CONSIDERATION
43 In this Court, Mr Pearson did not seek to challenge the primary judge's construction of cl 14.4. We respectfully regard his Honour's view as correct. In this regard, the phrase "similar to or competitive with" refers to a "business or operation" of a company in the HRX group. The "similarity" postulated by this phrase is not concerned with points of comparison other than in respect of the business operations of HRX and its putative competitor in relation to sources of demand for their services. On this view, the phrase "a business or operation similar to or competitive with the business of" HRX or its associated companies is a composite expression encompassing business operations which were either actually competitive with HRX or potentially so by reason of their similarity to HRX' business at the time of termination of Mr Pearson's employment.
44 In addition to the three reasons given by the primary judge for this construction (which are set out in [32]-[34] above and with which we agree), reference might also be made in support of that construction to cl 14.1(e) of the service agreement, which contains an express reference to "the geographic nature of the restraints". This provides further contextual support for the primary judge's construction of cl 14.4 and his Honour's rejection of Mr Pearson's contention that the restraint was universal.
45 While the drafting of the definition is not as clear as it might have been, a construction which will preserve the validity of the contract is to be preferred to one which will make it void: Mills v Dunham [1891] 1 Ch 576 at 589 - 590.
46 HRX had an evident interest in preserving the customer connections which are the source of its income. It is well established that an employer's customer connection is a legitimate business interest which can support a reasonable restraint of trade where the employee in question controls the employer's customer connections (see, for example, Jardin v Metcash Limited (2011) 285 ALR 677 at [91], [95] and [97] per Meagher JA (with whom Young JA agreed) and more generally Heydon JD, The Restraint of Trade Doctrine (3rd ed, Lexis Nexus Butterworths, 2008) p 121-129).
47 In Elsley v J.G. Collins Insurance Agencies Limited [1978] 2 SCR 916 at 925-928, Dickson J delivering the judgment in the Supreme Court of Canada of Laskin CJ, Martland, Ritchie, Pigeon, Beetz, Pratte JJ and himself said in a passage which, though lengthy, deserves citation in full:
…Whether a restriction is reasonably required for the protection of the covenantee can only be decided by considering the nature of the covenantee's business and the nature and character of the employment. Admittedly, an employer could not have a proprietary interest in people who were not actual or potential customers. Nevertheless, in exceptional cases, of which I think this is one, the nature of the employment may justify a covenant prohibiting an employee not only from soliciting customers, but also from establishing his own business or working for others so as to be likely to appropriate the employer's trade connection through his acquaintance with the employer's customers. This may indeed be the only effective covenant to protect the proprietary interest of the employer. A simple non-solicitation clause would not suffice.
There are cases which uphold the validity of a covenant prohibiting an employee from engaging in a particular type of work within a specified area, and for an acceptable period of time after the termination of his employment: see e.g. Fitch v. Dewes [1921] 2 AC 158; Marion White v. Francis [1972] 1 WLR 1423; P.C.O. Services Ltd. v. Rumleski [1963] 2 OR 62; Campbell, Imrie and Shankland v. Park [1954] 2 DLR 170. In each of these cases the employee was in a position where he acquired a close personal acquaintance with the clients or customers of the business. Such a restrictive covenant was reasonable, in the words of Lord Birkenhead in Fitch v. Dewes [1921] 2 AC 158 at p. 165, in order that the employee "should not be in a position to use the intimacies and knowledge which he had acquired in the course of his employment in order to create a practice of his own in that same place and by doing so undermine the business and the connection of the [employer]." In the present case, when the clause was drafted it was known that Elsley had, or would acquire, a special and intimate knowledge of the customers of his prospective employer and the means of influence over them.
In the leading case of Morris v. Saxelby [1916] 1 AC 688 Lord Parker enunciated with clarity the circumstances in which a covenant taken by an employer from an employee or apprentice will be enforceable. He said, at p. 709:
Wherever such covenants have been upheld it has been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer's trade secrets as would enable him, if competition were allowed, to take advantage of his employer's trade connection or utilize information confidentially obtained.
It is difficult to envisage a factual situation in which an employee would be in a better position than that of Elsley in the present case, to obtain "personal knowledge of and influence over the customers of his employer." Later in his speech, Lord Parker made the point that it is of importance: whether "the defendant ever came into personal contact with the plaintiff's customers." The same point is made in the following passage from Cheshire & Fifoot, The Law of Contract (8th ed.), at p. 369:
A restraint is not valid unless the nature of employment is such that customers will either learn to rely upon the skill or judgment of the servant or will deal with him directly and personally to the virtual exclusion of the master, with the result that he will probably gain their custom if he sets up business on his own account.
In the view which I take of this case a covenant against solicitation would not have been adequate to protect the proprietary interest entitled to protection … Elsley testified that he did not solicit former clients; notwithstanding, two hundred clients switched their custom to him. That is a vivid illustration of what Lord Parker had in mind in speaking of the influence of an employee over the customers of his employer … As Salter J. said in the case of Putsman v. Taylor [1927] 1 SCR 319 at p. 642, a covenant against solicitation "is difficult to enforce; it is difficult to show breach and difficult to frame an injunction." The difficulty is demonstrated in this case. Does an advertisement which comes to the attention of former clients amount to solicitation? Was there solicitation by Elsley? I need not attempt to answer those questions. The point is that a non-solicitation covenant, in the circumstances here found, would have been meaningless.
48 It is apparent from the factual findings of the primary judge that Mr Pearson's position of influence over HRX' customers is no less strong than that evidently enjoyed by Mr Elsley.
49 In Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9 at [25] Brereton J explained an employer's legitimate interest in the protection of its customer connections. His Honour said:
It is plain that an employer's customer connection is an interest which can support a reasonable restraint of trade: Hitchcock v Coker (1837) 6 Ad & El 438 at 454, [1835-42] All ER Rep 452 at 456-457 (Tindal CJ); Herbert Morris Ltd v Saxelby (at 709); Dewes v Fitch [1920] 2 Ch 159 at 181; Coote v Sproule (1929) 29 SR (NSW) 578 at 580, 46 WN (NSW) 180 at 181 (Harvey CJ in Eq); Lindner v Murdock's Garage (at 633-634) (Latham CJ, Webb J agreeing), (at 650) (Fullagar J), (at 654) (Kitto J); and Koops Martin Financial Services Pty Ltd v Reeves (at [29]-[33]). Such a restraint is legitimate if the employee has become, vis-à-vis the client, the "human face"of the business, namely the person who represents the business to the customer - or, as it was put by Hoover J in Arthur Murray Dance Studios of Cleveland Inc v Witter (1952) 105 NE (2d) 685 at 706 (Ohio): "The personal relation between the employee and the customer [is] such as to enable the employee to control the customer's business." (And see Twenty-First Australia Inc v Shade (Young J, 31 July 1998, unreported) at 12; Koops Martin Financial Services Pty Ltd v Reeves (at [34]).) While the employer is not entitled to be protected against mere competition by a former employee, the employer is entitled to be protected against unfair competition based on the use by the employee after termination of employment of the customer connection which the employee has built up during the employment - which, because the employee has in effect represented the employer from the customer's perspective during the employment, might at least temporarily appear attached to the employee, but in truth belongs to the employer: Koops Martin Financial Services Pty Ltd v Reeves (at [30]).
50 It is significant that none of the authorities cited by Mr Pearson was concerned with an employment relationship in which the principal function of the employee in question was the actual development and retention of the customer base and the pursuit of new business on behalf of the employer.
51 In our respectful opinion, HRX' interest in protecting its customer connections was sufficient to justify HRX' bargaining for protection against the risk that the personal contacts made by Mr Pearson in the course of HRX' business would follow him unbidden to a new employer. That interest went beyond HRX' interest in confidential information and would not sufficiently be protected by the confidentiality provision of the service agreement. And the non-solicitation provision would not have protected HRX from the risk that its customers, knowing of Mr Pearson's move to Talent2, would choose to move their business to Talent2 unbidden by Mr Pearson and without even discussing the move with him. Further, the non-solicitation clause would be engaged only if there were a reduction in HRX' business: if an existing customer took new business to Talent2 upon an invitation from Mr Pearson, that conduct would not be caught by the non-solicitation clause. Finally, the non-solicitation clause might not provide practical protection to HRX if HRX did not become aware of a breach.
52 It has been recognised that a confidentiality clause may not afford adequate practical protection to an employer's interests in preserving trade secrets. In Woolworths Ltd v Olson [2004] NSWCA 372, a restraint on subsequent employment was held to be justified by the need to protect a valuable trade secret. Mason P (with whom McColl and Bryson JJA relevantly agreed) said at [67]:
A recognised method of such protection is the procurement of a restraint upon the employee given access to such information taking up employment with a competitor whom he might be willing to provide with such information. A reasonable employment restraint is easier to enforce than a breach of confidence or breach of copyright claim; it removes the temptation for the former employee to offer and for the new employer to solicit confidential information; and it provides certainty of definition as regards the area of confidential information to be protected. These interests have been judicially recognised (see Littlewoods Organisation Ltd v Harris [1977] 1 All ER 1472 at 1479, 1485, Wright at 333, Kone Elevators at p43, 834).
53 As Dickson J noted in Elsley, the protection afforded by the non-solicitation and confidentiality provisions is unlikely to be perfect given the difficulties of proof of breach. In Lindner v Murdock's Garage (1950) 83 CLR 628, Latham CJ also observed at 636-7 that an employer's interest in customer connections may not be sufficiently protected by a covenant against solicitation and that a covenant against competition may be a more reasonable form of protection as
… a covenant against solicitation … is difficult to enforce; it is difficult to show breach and difficult to frame an injunction. The master is entitled to protect himself by a covenant against competition [637].
54 It is not in the least fanciful to regard the non-solicitation clause here as an inadequate protection for HRX. In concluding that an injunction to enforce the terms of the restraint was appropriate, the primary judge referred at Reasons [56] to an email sent by Mr Pearson to an existing client of HRX on 12 December 2011. It said relevantly:
I cannot solicit your business … but I believe you can solicit my services if you know what I mean.
55 In this Court, Senior Counsel for Mr Pearson made the unedifying submission that the sending of this email was indeed a breach of the non-solicitation clause by his client; yet that HRX was sufficiently protected by its terms because Mr Pearson undertook to abide by them. It is, no doubt, correct that the sending of this email was a breach of the non-solicitation clause; but to acknowledge that now is a cold comfort to HRX. Had this litigation not been commenced by HRX, it might never have known of this communication.
56 It follows from what we have said that we would reject Mr Pearson's argument that there was no legitimate interest of HRX which might support the restraint in cl 14.4 of the service agreement.
57 Additionally, it seems to us that HRX' legitimate interests were not confined to the protection of its customer connections as they existed at the time of Mr Pearson's departure from HRX' employment. HRX had a legitimate interest in obtaining the full benefit of its bargain with Mr Pearson while he was employed by it so as to maximise the extent of customer connections made during the term of his employment. A contracting party's interest in obtaining the benefit of its bargain is implicit in any contract: Mackay v Dick (1881) 6 App Cas 251 at 263; Butt v M'Donald (1896) 7 QLJ 68 at 70-71; and Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 606-607.
58 There are two aspects of HRX' interest in securing the benefit of its bargain which are relevant here. The first is the preservation of the value of the goodwill generated for HRX by Mr Pearson during the term of his employment which we have already discussed. As we have said, that interest would not be adequately protected by the non-solicitation provision if Mr Pearson were subsequently to take up employment with a firm to which HRX' customers might be disposed to bring new business without even discussing the move with him.
59 The second aspect of HRX' interest in having the benefit of its bargain is its interest in the expansion of its business while Mr Pearson was employed by it. That this was a real interest is confirmed by the shareholding arrangement with Mr Pearson. This arrangement provided him with an incentive to ensure the energetic pursuit by him of all potential customers, wherever they be located, if they could be serviced by HRX. The restraint clause, like this incentive, served the legitimate interest of HRX in the expansion of its business by ensuring that Mr Pearson would not, with an eye on the non-solicitation provision and a lively appreciation of the real possibility of a future for himself in business independent of HRX, "hang back" from the diligent pursuit of all potential customers.
60 In Koops Martin v Dean Reeves [2006] NSWSC 449 Brereton J acknowledged the legitimacy of a contractual stipulation to remove the temptation to refrain from the wholehearted pursuit of the target market. His Honour said at [43]-[44]:
The position so far as concerns personal connections may I think be summarised as follows. First, the mere fact that the employee has friends or relations amongst, or makes friends with, customers of his employer, is not a sufficient connection to support a restraint. Secondly, however, if the employee in the course of employment gains special knowledge of or influence over the employer's customers, such as would give the employee an unfair advantage in competition, that will support a restraint, even if the customers include persons who are or have become the employee's friends or acquaintances.
A more robust view is taken where the employee's role includes obtaining and extending custom for the employer's business. When an employee's duty includes to build up the employer's clientele as well as to deal with existing clients, a wide restraint is more likely to be upheld, because in such circumstances the employer is entitled to protection against the employee taking advantage of the period of service to prepare for later competition [G W Plowman & Sons Limited v Ash [1964] 1 WLR 568; [1964] 2 All ER 10; Normalec Limited v Britton [1983] 9 FSR 318, 324; Dean, The Law of Trade Secrets, 2nd edn, [11.150]. In such a case, the establishment of a customer connection is not merely incidental to the employment, but its purpose. In that context, a covenant is considered reasonable, first, to remove the temptation that by cultivation of the target market during employment, the employee may prepare the ground for its exploitation by himself after the employment ends, rather than for his employer during the employment; and, secondly, to prevent exploitation after termination of the employment by the employee of a connection with the customer which the employer has paid the employee to establish for the employer's benefit. In this context in particular, the fact that in pursuance of his or her obligations under the employment contract an employee has for reward introduced customers who include relatives, friends and acquaintances does not [absent specific agreement to the contrary: see Sharah v Healey [1982] 2 NSWLR 223] remove or cut away the basis which would otherwise exist for a restraint. (Emphasis added.)
61 We turn now to consider whether the restraint was a reasonable manner of protection for HRX' interests.
62 Where a contractual restraint protects a legitimate interest of the covenantee the restraint must afford no more than reasonable protection as between the parties, and in terms of the public interest. In our respectful opinion, in terms of HRX' interests, both in protecting its customer connections and in ensuring the diligent and faithful pursuit by Mr Pearson of business opportunities for HRX, cl 14.4 is, as between the parties, reasonably necessary to protect those interests.
63 The benefits secured to Mr Pearson under his contract of employment included an entitlement to shares. As he acknowledged, this entitlement was a quid pro quo for the protection of HRX against the risks involved in its dependence on his faithful and diligent performance of his crucial role in the business of HRX. The allocation of shares to Mr Pearson and the provision for payment for 21 of the 24 months of the restraint period confirm that the restraint was an aspect of a reasonable commercial arrangement as between the parties. In return for the restriction on Mr Pearson's career, he bargained successfully for a stake in HRX' business; a benefit which he acknowledged in cross-examination he would not have received had he not agreed to the restraint. There is no reason to think that there was any inequality of bargaining power in the negotiations which led to this arrangement. Indeed, Mr Pearson's prominence in his field was such that he might be said to have held the upper hand in the negotiations with Ms Leslie. In this regard, he was the first employee to negotiate a provision for payment by HRX during the period of his post-employment restraint.
64 The nature of the business in which HRX, Talent2 and Mr Pearson are engaged is such that the needs of customers, located in, say, Hong Kong, can be met by services provided or arranged by persons physically located in Australia. The geographical limitations on restraints on competition which have been the focus of attention in the authorities have little relevance in the assessment of the reasonableness of the geographic operation of the restraint in question. It is to be noted that cl 14.4 does not operate by reference to particular markets; rather, as Senior Counsel for HRX emphasised, conduct on Mr Pearson's part which occurs in Australia may have ramifications adverse to HRX' ability to provide services to existing customers who embark on overseas ventures or to overseas branches of existing customers.
65 The two-year restraint also reasonably accommodates the contractual cycle on which HRX operates. It thus affords HRX the opportunity to effect a renewal of its contracts with customers without the risk that the customer will choose to "stay" with Mr Pearson as the individual with whom it is familiar.
66 No separate argument was advanced by Mr Pearson to the effect that cl 14.4 was unreasonable so far as the public interest is concerned. In this regard, there is no reason to apprehend that cl 14.4 was not reasonably in the public interest. There is no reason to apprehend harm to the public interest in the ready availability of human resources recruitment services in Australia. The evidence is that the industry is competitive; the absence of Mr Pearson from the industry for two years is not likely to change that state of affairs.
67 It is also, we think, relevant to acknowledge that HRX was potentially a competitor in an international market for human resources recruitment services. Given the nature of the business of human resource recruitment, there appears to be no geographic barriers to the recognition of such a market. The public interest is actually enhanced by arrangements which promote the expansion of Australian business overseas, and the engagement of Mr Pearson on terms which ensured his diligent pursuit of such business on behalf of his employer in such an arrangement.